Question 6 (1 point)

The market for USB flash drives in Country C is perfectly competitive and is in equilibrium.

Domestic demand is given by Q^d = 300 - 4P and domestic supply is given by Q^s = 2P.

The world price for flash drives is $20.

Country C wishes to 'protect' its domestic flash memory industry. One policy option is to impose a tariff on all USB flash drives imported into country C from country A (the only other country that produces flash drives). The elected government of country C wishes to avoid tariffs, as it was elected partially on a 'free-trade' (no tariff) platform.

Country C agrees to forego any tariff on flash drives if country A sellers 'voluntarily' restrict sales of flash drives into country C. Country A agrees to sell no more than 120 flash drives to country C buyers.

When this quota restriction (technically, a Voluntary Export Restraint) is in place, will there be excess demand for, or excess supply of, USB flash drives in country C?

At what domestic price will there be equilibrium (neither excess demand nor excess supply) in the market for USB flash drives?

Question 6 options:

1)

At P_World, excess demand = 60 units; P_Quota (Q_D = Q_S + Quota) = $30

2)

At P_World, excess supply = 20 units; P_Quota (Q_D = Q_S + Quota) = $50

3)

At P_World, excess demand = 120 units; P_Quota (Q_D = Q_S + Quota) = $40

4)

At P_World, excess supply = 40 units; P_Quota (Q_D = Q_S + Quota) = $30

5)

At P_World, excess demand = 0; P_Quota = P_World